Slide #1.

Chapter ACCT 201 ACCT 201 5 Reporting and Analyzing Inventories ACCT 201 UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee Dr. Fred Barbee ACCT 201 1
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Slide #2.

ACCT 201 ACCT 201 Day #1 ACCT 201
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Slide #3.

Chapter 5 - Day 1 Agenda Topic LO Read HW Assigning Costs to P1 Inventory 210214 QS1, QS2; E1, E3, E4 Inventory Analysis A1, and Effects A2 214218 E2, E6 No Homework Due Today!
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Slide #4.

ACCT 201 What is Inventory? ACCT 201 Usually, inventory includes tangible property that: Is held for sale, or ACCT 201 Will be used in producing goods or services for sale. Dr. Fred Barbee ACCT 201 4
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Slide #5.

ACCT 201 What is Inventory? ACCT 201 Inventory is classified as a current asset; ACCT 201 It is listed below accounts receivable on the balance sheet. Dr. Fred Barbee ACCT 201 5
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Slide #6.

Chapter ACCT 201 ACCT 201 5 Reporting and Analyzing Inventories ACCT 201 Assigning Costs to Inventory Dr. Fred Barbee ACCT 201 6
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Slide #7.

ACCT 201 Management Issues ACCT 201 Costing Method FIFO, LIFO, WA, or Specific ID Inventory System ACCT 201 Perpetual or Periodic Dr. Fred Barbee ACCT 201 7
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Slide #8.

ACCT 201 Management Issues ACCT 201 Items included in inventory and their costs. Use of market values or other estimates. ACCT 201 Dr. Fred Barbee ACCT 201 8
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Slide #9.

ACCT 201 The Text Notes (p. 210) ACCT 201 Accounting for inventory affects both the balance sheet and the income statement. ACCT 201 A major goal for accounting for inventory is to match relevant costs against revenues. Dr. Fred Barbee ACCT 201 9
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Slide #10.

ACCT 201 Conflicting Objectives ACCT 201 Proper determination of net income Income Statement ACCT 201 Proper valuation of inventory Balance Sheet Dr. Fred Barbee ACCT 201 10
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Slide #11.

Determining Cost of Goods Sold Beginnin Net Allocating costs to ending g Purchas inventory and cost of goods Inventor es ysold is not a problem if prices are constant. Goods Available For Sale Ending Inventory Cost of Goods Sold
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Slide #12.

ACCT 201 ACCT 201 ACCT 201 At an example Dr. Fred Barbee ACCT 201 12
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Slide #13.

Determining Cost of Goods Assume 2,000 gallons cost Assume this $1.10 and 2,000 cost $1.25 cost $1.00 Sold Beginning Inventory 1,000 Gallons Net Purchases 4,000 Gallons GAS 5,000 Gallons Ending Inventory Cost of Goods Sold
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Slide #14.

Determining Cost of Goods Assume 2,000 gallons cost Assume this $1.10 and 2,000 cost $1.25 cost $1.00 Sold Beginning Inventory 1,000 Gallons 4,980 Gallons. Cost ??? Ending Inventory Purchase 20 Gallons of Gas. GAS 5,000 Gallons Net Purchases 4,000 Gallons 20 Gallons. Cost ??? Cost of Goods Sold
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Slide #15.

ACCT 201 Assigning Costs to Inventory ACCT 201 Inventory affects . . . Balance Sheet Income Statement ACCT 201 The matching principle requires matching cost of sales with sales. Dr. Fred Barbee ACCT 201 15
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Slide #16.

ACCT 201 Physical Flow Vs. Cost Flow ACCT 201 ACCT 201 Dr. Fred Barbee ACCT 201 16
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Slide #17.

ACCT 201 The Physical Flow of Goods ACCT 201 BEGINNING END P HYSICAL U NITS       ACCT 201 SALES Dr. Fred Barbee ACCT 201 17
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Slide #18.

ACCT 201 The Flow of Dollars (Costs) ACCT 201 BEGINNING END $     ACCT 201 SALES COST FLOW CAN BE :  SPECIFIC IDENTIFICATION ;  FIRST -IN , F IRST -OUT ;  LAST -IN , FIRST -OUT ; OR  WEIGHTED -AVERAGE Dr. Fred Barbee ACCT 201 18
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Slide #19.

ACCT 201 Exh. 5.1 Use of Inventory Methods in Practice . . . ACCT 201 ACCT 201 Dr. Fred Barbee ACCT 201 19
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Slide #20.

ACCT 201 Inventory: The Text Example ACCT 201 ACCT 201 Dr. Fred Barbee ACCT 201 20
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Slide #21.

ACCT 201 Trekking Sporting Goods ACCT 201 Among its products, Trekking carries one type of mountain bike whose sales are directed at biking clubs. Its customers usually purchase in amounts of 10 or more bikes. ACCT 201 Trekking’s mountain bike inventory (in units) is shown in Exhibit 5.2 (p. 211). Dr. Fred Barbee ACCT 201 21
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Slide #22.

Example Inventory Information ACCT 201 ACCT 201 ACCT 201
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Slide #23.

Direct Transaction Effects Inventor COGS y Purchases Increase N/A Merchandise Decreas Increas Sales e e Transportation-In Increase N/A Purchases Decreas Discounts and N/A e Returns ACCT 201 ACCT 201 ACCT 201
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Slide #24.

ACCT 201 ACCT 201 ACCT 201 At Specific Identification Dr. Fred Barbee ACCT 201 24
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Slide #25.

ACCT 201 Specific Identification ACCT 201 ACCT 201 When units are sold, the specific cost of the unit sold is added to cost of goods sold. Dr. Fred Barbee ACCT 201 25
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Slide #26.

Specific Identification The above purchases were made by Trekking in August. On August 14, Trekking sold 8 bikes originally costing $91 and 12 bikes originally costing $106.
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Slide #27.

Specific Identification The Cost of Goods Sold for the August 14 sale is $2,000, leaving $500 and 5 units in inventory. COGS = $2,000 EI = $500
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Slide #28.

Specific Identification Additional purchases were made on August 17 and 28. Cost of sales on August 31 were as follows: 2 @ $91, 3 @ $106, 15 @ $115, & 3 @ Exh. 5.4
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Slide #29.

Specific Identification Cost of Goods Sold for August 31 = $2,582 Exh. 5.4
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Slide #30.

Specific Identification Income Statement COGS = $4,582 Balance Sheet Inventory = $1,408
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Slide #31.

ACCT 201 Cost Flow Assumptions ACCT 201 ACCT 201 Dr. Fred Barbee ACCT 201 31
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Slide #32.

ACCT 201 Cost Flow Assumptions ACCT 201 When specific identification is not used, the accountant must make an assumption regarding the movement of costs through a firm’s accounting system. ACCT 201 Dr. Fred Barbee ACCT 201 32
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Slide #33.

ACCT 201 Cost Flow Assumptions ACCT 201 Remember . . . The flow of costs is an accounting consideration, and ACCT 201 Has no direct relationship to the physical flow of goods through the firm. Dr. Fred Barbee ACCT 201 33
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Slide #34.

ACCT 201 Cost Flow Assumptions ACCT 201 Cost flow assumptions are used to derive computations for . . . Cost of Goods Sold on the Income Statement, and ACCT 201 Ending Inventory on the Balance Sheet. Dr. Fred Barbee ACCT 201 34
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Slide #35.

ACCT 201 LIFO and FIFO ACCT 201 ACCT 201 Dr. Fred Barbee ACCT 201 35
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Slide #36.

FIFO Allocation COG S EI Inventory Costs Oldest Costs Recent Costs LIFO Allocation EI COG S
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Slide #37.

ACCT 201 ACCT 201 ACCT 201 At FIFO First-in, First-out Dr. Fred Barbee ACCT 201 37
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Slide #38.

First-In, First-Out (FIFO) The above purchases were made by Trekking in August. On August 14, Trekking sold 20 bikes.
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Slide #39.

First-In, First-Out (FIFO) The Cost of Goods Sold for the August 14 sale is $1,970, leaving $530 and 5 units in inventory.
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Slide #40.

First-In, First-Out (FIFO) Additional purchases were made on August 17 and August 28. On August 31, an additional 23 units were sold.
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Slide #41.

First-In, First-Out (FIFO) Cost of Goods Sold for August 31 = ($530 + $2,070) = $2,600
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Slide #42.

First-In, First-Out (FIFO) Income Statement COGS = $4,570 Balance Sheet Inventory = $1,420
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Slide #43.

FIFO Allocation COG S EI Inventory Costs LIFO Allocation Cost of Goods Oldest Sold consists of Costs EI older costs. Ending Inventory COG approximates Recent S replacement Costs costs.
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Slide #44.

ACCT 201 ACCT 201 ACCT 201 At LIFO Last-in, First-out Dr. Fred Barbee ACCT 201 44
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Slide #45.

FIFO Allocation COG S EI Inventory Costs Oldest Costs Recent Costs LIFO Allocation EI COG S
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Slide #46.

Last-In, First-Out (LIFO) The above purchases were made by Trekking in August. On August 14, Trekking sold 20 bikes.
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Slide #47.

Last-In, First-Out (LIFO) The Cost of Goods Sold for the August 14 sale is ($1,590 + $455) $2,045, leaving $455 and 5 units in inventory.
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Slide #48.

Last-In, First-Out (LIFO) Additional purchases were made on August 17 and August 28. On August 31, an additional 23 units were sold.
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Slide #49.

Last-In, First-Out (LIFO) Cost of Goods Sold for August 31 = ($1,190 + $1,495) = $2,685
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Slide #50.

Last-In, First-Out (LIFO) Income Statement COGS = $4,730 Balance Sheet Inventory = $1,260
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Slide #51.

FIFO Allocation Inventory Costs Ending Inventory Oldest consists ofCosts older COG costs. S Cost of Goods Sold is EI approximately Recent Costs equal to current costs LIFO Allocation EI COG S
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Slide #52.

ACCT 201 ACCT 201 ACCT 201 At WeightedAverage Dr. Fred Barbee ACCT 201 52
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Slide #53.

Weighted Average When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold. Cost of Goods Units on hand Available for ÷ on the date Sale of sale
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Slide #54.

Weighted Average The above purchases were made by Trekking in August. On August 14, Trekking sold 20 bikes.
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Slide #55.

Weighted Average Cost of goods available for sale Total units in inventory Weighted average cost per unit $ $ 2,500 ÷ 25 100 The weighted average cost per unit is computed prior to each
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Slide #56.

Weighted Average Additional purchases were made on August 17 and August 28. On August 31, an additional 23 units were sold.
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Slide #57.

Weighted Average Purchase 8/1 Purchase 8/3 Sale 8/14 Purchase 8/17 Purchase 8/28 Units available for sale 10 15 (20) 10 20 35 Cost of goods available for sale Total units in inventory Weighted average cost per unit $ $ 3,990 ÷ 35 114
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Slide #58.

Weighted Average Income Statement COGS = $4,622 Balance Sheet Inventory = $1,368
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Slide #59.

ACCT 201 Compare the Alternatives ACCT 201 ACCT 201 Specific Identification First-in, First-out Last-in-Firstout Weighted Average Dr. Fred Barbee ACCT 201 59
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Slide #60.

Sales COGS GM LIFO $6,05 0 4,730 $1,32 0 AVG $6,05 0 4,622 $1,42 8 LIFO charges recent (higher) costs to COGS  Report lower NI. Dr. Fred Barbee Compromi se ACCT 201 FIFO $6,05 0 4,570 $1,48 0 ID $6,05 0 4,582 $1,46 8 FIFO charges recent (lower) costs to COGS  Report higher NI. 60
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Slide #61.

Chapter ACCT 201 ACCT 201 5 Reporting and Analyzing Inventories ACCT 201 Inventory Analysis and Effects Dr. Fred Barbee ACCT 201 61
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Slide #62.

Net Income Comparisons LIFO FIFO In Periods of Rising Prices Lowest Net Highest Income Net Income In Periods of Falling Prices Highest Lowest Net Net Income Income Dr. Fred Barbee ACCT 201 62
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Slide #63.

ACCT 201 Financial Reporting ACCT 201 Because prices change, the choice of an inventory method is important. ACCT 201 Let’s look at income statements under each method.
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Slide #64.

ACCT 201 Tax Reporting ACCT 201 The IRS identifies several acceptable methods for inventory costing for financial reporting and reporting taxable income. ACCT 201 If LIFO is used for tax purposes, the IRS requires it be used in financial statements. Dr. Fred Barbee ACCT 201 64
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Slide #65.

ACCT 201 Consistency in Reporting ACCT 201 The consistency principle requires a company to use the same accounting methods period after period so that financial statements are comparable across periods. ACCT 201 Dr. Fred Barbee ACCT 201 65
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Slide #66.

ACCT 201 Errors in Reporting Inventory – Income Statement ACCT 201 ACCT 201 Inventory Error Cost of Net Income Goods Sold Understate EI Understate Overstated d Understate BI Understate Overstated d Understate Overstate EI Overstated d Understate Overstate BI Overstated Dr. Fred Barbee ACCT 201 66 d
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Slide #67.

ACCT 201 Errors in Reporting Inventory – Balance Sheet ACCT 201 Inventory Error Understate EI Assets Equity Understate Understate d d Overstate EI Overstated Overstated ACCT 201 Dr. Fred Barbee ACCT 201 67
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Slide #68.

Chapter ACCT 201 ACCT 201 5 Reporting and Analyzing Inventories ACCT 201 FIFO Vs. LIFO Which should it be? Dr. Fred Barbee ACCT 201 68
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Slide #69.

ACCT 201 Income Statement ACCT 201 Objective: Match expenses to revenues LIFO does a better job ACCT 201 Dr. Fred Barbee ACCT 201 69
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Slide #70.

ACCT 201 Income Statement ACCT 201 Tradeoff Over time the use of LIFO could result in a meaningless inventory figure - affecting both ACCT 201 Working capital, and Current ratio Dr. Fred Barbee ACCT 201 70
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Slide #71.

ACCT 201 Balance Sheet ACCT 201 Objective: Fairly reflected assets FIF0 does a better job ACCT 201 Dr. Fred Barbee ACCT 201 71
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Slide #72.

ACCT 201 Balance Sheet ACCT 201 Tradeoff Use of FIFO results in a mismatch of revenue and expenses ACCT 201 COGS is determined using older costs while revenues are based on current selling prices Dr. Fred Barbee ACCT 201 72
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